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Investing in Art is No Paint-By-Numbers Task

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Skyrocketing art prices may have inspired some high-net-worth clients to ask about adding a few paintings to their portfolios. But advisors should help them view this creative asset class with a healthy dose of realism.

In November, the $170.4 million sale of an Amedeo Modigliani oil painting at Christie’s in New York was the second-highest price ever paid for an artwork at auction, and the highest ever for a Modigliani work. The buyer was Liu Yiqian, a taxi-driver-turned-billionaire-art-collector whose rags-to-riches tale reads like a movie script.

Buyers at the November auction also paid record-setting prices for works by Gustave Courbet and Roy Lichtenstein. All told, Christie’s raised $491.4 million.

It’s understandable if such sales prices have art-enthusiast clients seeing painted visions of dollar signs.

But Dan Desmond, who leads the Blue Rider Group as part of Morgan Stanley Wealth Management, cautions: “The art market has grown dramatically in the past decade. It’s great for artists and museums. But tastes change and the market changes. [Art] valuations right now are very high. We are going to see a cooling-off period.”

Desmond believes his clients have already absorbed that message. “A lot of people get attracted to the art market for different reasons than our client base,” he says. “[Our clients] are not approaching it as an investment but as collectors, so some of the prices of art are just a distraction.”

The Blue Rider Group, a three-advisor team, is a relative newcomer in pitching financial services to art buyers. Their name was inspired by the Der Blaue Reiter, a group of subversive Munich artists who emerged in the early 20th century.

For clients, Blue Rider Group provides “a short list of best-in-class” professionals whom art collectors rely upon — including insurers, brokers, private dealers, movers, and trust and estate lawyers. “Eighty percent of what you need to hold, move, buy and sell art, we have at our fingertips,” says Desmond.

Desmond’s team does not advise client collectors on what art to buy and not buy; they leave those judgments up to the art analyst experts. Instead, they each spend “almost 95% of their time” on investment portfolio management and wealth planning, Desmond says.

Buy What You Like

Most people know nothing about the art market, says Deena Katz, chairwoman of Evensky & Katz/Foldes Financial Wealth Management of Coral Gables, Fla., which has over $1.5 billion in assets. “It is risky, and there is a great possibility to get scammed as well.  I tell clients, buy what you like for your enjoyment, but few people have the knowledge, resources or ability to know whether an interesting piece of contemporary art will skyrocket.”

She adds, “None of our clients have the ability to throw millions at an art piece and still sustain their standard of living for 30 or 40 years.  I am more concerned about funding longevity than having them risk money on a piece of art as an investment.  You want to take that kind of risk, visit the high-roller room at a casino in Vegas.”

Ross Gerber agrees that art investing invites risks but, at the same time, he understands why some of his clients’ interest in such a strategy has been piqued.

“Art is very popular now as an investment for many reasons,” says Gerber, who is president and CEO of Santa Monica, Calif.-based Gerber Kawasaki Wealth & Investment Management, which has more than $375 million in AUM. He evaluates clients’ wealth in terms of their planning goals, and if they can afford to invest in art, Gerber doesn’t stop them.

But Gerber also abides by one prevailing principle when it comes to purchasing art: “The key is not to sell it. You should buy these things with no intention to sell. It is to be enjoyed and passed on.”

Tools of the Trade

A few startup companies have developed analytical tools for advisors whose clients have the inclination and wealth to consider investing in art.

Artnet and Beautiful Asset Advisors both offer advisors and clients searchable databases of prices for artworks sold at public auction.

What is typically not captured in the databases of these tools are comprehensive records of artworks sold privately by dealers, which leaves out as much as half of the roughly $50 billion global market in artworks.

And the prices reported by auction houses also merit a closer look, says Leslie Rankow, who advises collectors in New York and earns a commission on their purchases. Christie’s and its rival auction houses employ a marketing strategy that assigns each auction a theme, she notes. This allows auctioneers to feature a wide variety of artworks at one sale, as long as they fit the broad theme. Thus, sellers can attract buyers to pieces by both the masters and contemporary artists.

Theme Approach

The theme for Christie’s November auction was “The Artist’s Muse,” and the paintings and sculptures were by artists from the 1860s through the 2000s. This approach improves the odds that works from all eras will fetch higher prices, because the masters’ works will stand out and the contemporary works will be viewed as part of a continuum of artworks’ long-term value, Rankow says.

“There is so much money around,” Rankow says, that the strategy has, in large part, succeeded. But should the economy change direction and that money evaporate, Rankow warns, “I’m afraid that contemporary works are going to sink back into a more realistic price range.”

Rankow nonetheless welcomes the idea of advisors helping clients who want to buy and finance art for their collections.

Dedicated teams to help clients buy art exist at Citi, UBS, Societe Generale and even Emigrant Bank. Because Emigrant has generally cast itself as a bank that doesn’t cater to ultrahigh-net-worth clients, its entrance into the art-financing arena shows “the long-reach tentacles” of art-market fever, Rankow says.

Suzanne Gyorgy, who leads the Citi Private Bank Art Advisory & Finance team, also expresses caution about today’s “frothy” art price levels. Gyorgy’s art analysts aid Citi advisory teams who have clients seeking intelligence on art values and collecting strategies.

Along with helping clients research and bid on works for their collections, the team assists them in finding financing for their art buys, incorporating and accounting for the works in estate plans, moving and storing the artworks, and insuring them.

“Our role is to take a very conservative approach,” Gyorgy says. Her team’s analysts make sure clients understand that, as with any investment, art valuations will rise and fall. The team’s recommended strategy for clients: Buy as collectors, not speculators.

Gyorgy also recognizes a reality that throws cold water on some of the fervor regarding top-dollar art prices: At the same Christie’s auction at which the Modigliani nude sold for such an astronomical sum, 10 other works failed to sell.

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